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Think Twice Before Making a Charitable Contribution of State Income Taxes

June 5, 2018


High income tax states like New York and New Jersey have already passed laws trying to circumvent the $10,000 state and local income tax deduction cap (SALT) provision in the Tax Cuts and Jobs Act of 2017 (TCJA), and others like California and Connecticut are considering similar moves. They all contain essentially the same tactic--encourage taxpayers to make charitable contributions to state-and-local-controlled funds in lieu of paying state and local income taxes in order to claim a charitable deduction. But the IRS has stepped in quickly (see IRS Notice 2018-54) to warn taxpayers away from these schemes, leaving many in the lurch when trying to make the best decision for tax and financial planning.


The Maryland legislature has likewise taken up bills to circumvent the SALT provision, but Governor Hogan and state Republicans have not proven willing to go along. DC has had similar debate, while Virginia has so far steered clear of the controversy. 


We would advise taxpayers to wait on clear IRS guidance regarding charity-instead-of-SALT schemes. Substantial penalties could be levied against individuals even while the issue works its way through the courts. 


Taxpayers vulnerable to the SALT limits should keep in mind that they will likely have offsetting benefits from the TCJA, such as the increase to the Alternative Minimum Tax threshold and the 20% self-employment income deduction. All others will be shielded by the new $24,000 standard deduction--making the $10,000 SALT limit moot. 


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